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Sometimes chances never die

The problem

When we go into business with people we normally get on well with and trust them otherwise we would choose different business partners. It is a sad fact of business life that I see a lot of business people who are disappointed or even shocked by their bad behaviour of their partners. Because those partners are trusted, sometimes it takes a long time to find out. Then we must decide if it is too late to ask them to pay back what they have taken.

The right to bring a claim against somebody in most cases does not last forever. How long you have to issue proceedings is dealt with in the Limitation Act 1980. There are different periods for different claims. For most of the stuff I deal with it is 6 years or 12 years.

The Basics

It is often said that directors are the trustees of the company’s assets. I am often asked to advise the company on its potential claims against directors and, as I have said before, when I do shareholder disputes I always look at the performance of the other shareholders as directors as a way of bringing them to the negotiating table.

There is a distinction between a director and a trustee that I do not need to go into in this issue. If you want me to do that in future just drop me a line. What I am looking at here is when the directors are treated as trustees.

The Limits

There is no limitation on bringing a claim against a trustee for breach of trust or to recover trust property from the trustee. Otherwise the limitation period is 6 years. However, there are two different sorts of trustee.

A person who was appointed trustee or who took on the obligations of a trustee before they did whatever they did to the trust property that the claim is about; and

A person who becomes a trustee because of the way they have dealt with property.
To make things clearer, an example is a case I did where a director stole money from the company. He paid it into accounts in the names of his wife and children. They knew it could not possibly be his money. The director was a category one trustee and the wife and children were category two trustees.

Those of you who have read previous issues of Streetwise will know that a director is not allowed to profit from being a director (other than being paid, of course).

The Answer

So what the courts looked at recently is whether a director who had taken a secret profit could defend himself on the ground that the claim was brought more than 6 years after the secret profit was made. The payments made by the company that gave rise to the secret profit were proper payments. The director had not taken any company property. He said that the unlimited period applied only to the actual taking of the company’s property and not to what had happened here namely cashing in on the back of a proper payment. He got away with it at the first trial but the company appealed and the Court of Appeal said the company was right.

The basis of the decision was that the court has to look at the identity of the person who committed the wrong and not what they actually did wrong. The director was a trustee and it did not matter if he took company property or made money on the back of it. He was liable because he was a trustee.

Therefore, if you think that directors have taken money or made money from the company at any time in the past you can still ask them to pay it back.

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